Macquarie Group Ltd.

11/17/2023 | Press release | Archived content

US Inflation Reduction Act drives demand for capital and project expertise in methanol and renewable natural gas

Perspectives

US Inflation Reduction Act drives demand for capital and project expertise in methanol and renewable natural gas

17 November 2023

The Inflation Reduction Act (IRA) - the most ambitious piece of climate legislation in the history of the United States1 - has altered the economics of renewable energy, triggering a surge in investment across the country and accelerating the development and deployment of new clean energy, clean technology manufacturing and infrastructure investment.2

Through a range of tax incentives, grants and loans, the IRA encourages businesses to make use of clean technologies and fuels that are critical to the energy transition, stimulating demand by incentivising investors, developers and producers to nurture and advance new market sectors.3 Some of the most notable components are provisions that catalyse investment in technologies that enable emissions reductions in carbon-intensive industries such as chemicals, utilities, steel, agriculture, transportation and logistics infrastructure.

Alongside already competitive solar, wind and battery technologies, the IRA is helping to accelerate the development of carbon-mitigating fuels such as methanol and renewable natural gas (RNG). Methanol has seen a growth in demand from global shipping companies looking to comply with emerging emissions targets, and RNG is in demand from heavy trucking companies and utilities in the US. Producers of both fuels are using IRA incentives to support project finance and build new and adapt existing production facilities and logistics infrastructure.

Incentivising the development of the clean fuels economy

The global shipping industry currently accounts for 3 per cent of climate-warming emissions globally;4 without abatement, the industry could represent as much as 10 per cent of global emissions by 2050.5 To address this, several government and regulatory bodies across the globe have proposed or enacted emissions legislation and targets for the industry,6 and more action is forthcoming. These expanding regulatory regimes - as well as customer demand and investor pressure to decarbonise - are prompting shipping companies to seek out cleaner shipping fuels such as methanol to reduce emissions from their fleets.7,8

Low-carbon methanol can reduce a ship's carbon dioxide emissions by up to 95 per cent, reduce nitrogen oxide emissions by up to 80 per cent and eliminate sulphur oxide and other particulate matter emissions almost entirely.9 Like petroleum-based marine fuels, methanol is an energy-dense liquid fuel that can be stored and transported without the need to refrigerate or be kept under pressure.10 For the shipping industry, methanol is attractive because of its technical readiness, safe handling and cost-competitiveness compared with other fuels.11

Methanol is a chemical building block for hundreds of everyday products, including plastics, paints, car parts and construction materials, and is a clean energy resource used to fuel cars, trucks, buses, ships, fuel cells, boilers and cook stoves. Under the IRA, we expect methanol producers that produce cleaner forms of hydrogen will qualify for hydrogen production tax credits and those who sequester carbon in their processes to qualify for carbon sequestration tax credits.

To ease the transition, shipping companies are choosing dual-fuelled engines that can operate on both methanol and traditional marine fuels for both new builds and when retrofitting vessels. By the end of this decade, 85 per cent of two-stroke vessels will be dual-fuelled capable, compared with just 57 per cent in 2022.12 MAN Energy Solutions, an industrial engine designer, foresees a production and supply need for low-carbon methanol of approximately 128 million tons by 2040, and 255 million tons by 2050.12

Macquarie's Commodities and Global Markets business is active in supporting the development of the low-carbon methanol economy. We provide methanol producers with solutions including natural gas and RNG supply, pipeline management, hedging, working capital and offtake marketing services. These commercial services build on our physical and financial capabilities, providing producers with market access, investors with comfort around their upstream asset investments and offtakers with delivered volumes," says Aarnoud van Weelderen, Senior Managing Director in Macquarie's Commodities and Global Markets business.

We are excited to keep providing solutions based on our capabilities in supporting the energy transition."

Aarnoud van Weelderen
Senior Managing Director
Macquarie Commodities and Global Markets

Improving the economics of producing RNG from livestock waste

Conventional natural gas is a key energy source for electricity generation in the US, supplying 39.9 per cent of fuel for electric power plants in 2022,14 up from 30 per cent in 2012.15 It plays an important role in the US energy transition by reducing reliance on coal and providing dispatchable power to match fluctuating renewables generation, and can be substituted or blended with RNG - a sustainable lower-carbon alternative - allowing utilities to reduce emissions from gas power generation.

Incentives within the IRA have significantly increased the potential for growth in the US RNG sector. For instance, for large livestock farms across the country with proximity to natural gas pipelines, it now makes economic sense to monetise their animal waste while reducing emissions from their operations. Livestock manure naturally emits methane, a greenhouse gas 25 times more potent than carbon dioxide at trapping heat in the atmosphere.16 While carbon-intensive in its raw form, the emitted raw methane can be captured and upgraded to remove contaminants, producing RNG, which is then injected into the existing natural gas pipeline infrastructure.

Efforts to produce RNG from livestock farms at scale have traditionally been limited by high costs and a lack of on-site infrastructure.17 However, IRA incentives are bringing down the cost of production and making it economically viable. Along with growing interest from gas-fired utilities, market drivers include increasing demand from transportation companies for a lower-emission alternative to diesel fuel (in compliance with federal and state policies) and evolving preferences from end users for fuels with lower carbon intensity.18

In 2022, Macquarie Capital expanded its RNG scope in the US by launching Aerogy, a platform that develops and operates RNG projects.19 Aerogy's flagship project is an anaerobic digestion facility located on a large dairy farm near Gillett, Wisconsin, that diverts livestock methane emissions by converting agricultural waste into energy. In the next few years, the farm is expected to produce up to 200,000 MMBtu of RNG per year - some of the highest biogas per-cow figures in the US market - while reducing the release of methane into the atmosphere.20

Investing in renewable fuels to support the energy transition

In 2022, Macquarie Capital created Aerogy a renewable fuels platform that develops, operates and invests in RNG infrastructure projects that convert waste into low-carbon energy. Upon its launch, Aerogy closed financing and commenced construction on an anaerobic digestion facility at Zahn's Farm, a leading dairy producer located near Gillett, Wisconsin. Across projects, Aerogy delivers alternative energy solutions through project development, financing, construction and commercial operation, supporting the energy transition in a range of sectors.

The IRA has effectively provided RNG producers with similar incentives that have been available to the wind and solar industries for the last 20-plus years. The investment and production tax credits now available to RNG producers have dramatically expanded the number of projects that can be undertaken."

Nicholas Gole
Global Head of Energy Transition, Infrastructure and Energy Capital
Macquarie Capital

Macquarie Capital works with third parties to facilitate delivery of the RNG to buyers via existing natural gas pipelines. In addition to its work on Aerogy, Macquarie Capital advises financial sponsors, such as private equity firms, as well as strategics such as utilities, on buying and selling RNG processing assets. For instance, the firm recently advised the unregulated arm of a gas utility on the sale of a portfolio of dairy farm RNG assets.

"Looking ahead, Macquarie Capital expects to see more investments in greenfield projects and growing financing needs across the capital stack, including tax equity. We also anticipate strategic acquirers such as oil and gas majors and utilities as well as financial sponsors will continue to seek out waste fuel-to-RNG projects and companies as part of their decarbonisation efforts," says Ankit Vanjara, Managing Director in Macquarie Capital's Power, Renewables and Energy Transition advisory group. "RNG production economics is site-specific. Producers will be looking for cost efficient and long-term access to waste streams with proximity to existing natural gas pipelines."

New markets, new opportunities

Efforts to decarbonise the US economy are not without their challenges. For businesses looking to build out their renewable energy offerings, the IRA offers unprecedented inducements - but leveraging them can be complex, requiring legal and tax expertise to navigate the new rules and regulations. However, as a catalyst for investment in the energy transition, the legislation goes further than any in US history to stimulate private capital investment, drive innovation and reduce the cost of production in renewable energy markets.21

In the 12 months after the IRA was passed, its provisions - including investment and production tax credits - resulted in more than $US110 billion in new investment in clean technology manufacturing alone.22 The addition of direct pay and transferability as new options to monetise these tax credits has also provided additional support for developers and sponsors as they look to build out the funding package for their projects.

Macquarie is working with clients and partners to leverage opportunities created by the IRA to scale up the deployment of cleaner technologies and support them on their paths to decarbonisation. Our experience deploying low-carbon solutions globally, along with the complementary capabilities of our business, positions us to support our clients in delivering on their near-term low-carbon strategies and long-term sustainability goals.

"Across Macquarie's global businesses, we have seen that when government policies change, markets change, and our clients take action," says Janet Dietrich, Global Head of Energy Transition and Strategy for Macquarie's Commodities & Global Markets business. "We're focused on shepherding our clients through the energy transition - providing not only risk management, market access, physical execution, logistics and capital solutions, but also in-depth knowledge of how to leverage the IRA to address new market opportunities."

Footnotes

  1. "FACT SHEET: One Year In, President Biden's Inflation Reduction Act is Driving Historic Climate Action and Investing in America to Create Good Paying Jobs and Reduce Costs," White House, 16 August 2023, https://www.whitehouse.gov/briefing-room/statements-releases/2023/08/16/fact-sheet-one-year-in-president-bidens-inflation-reduction-act-is-driving-historic-climate-action-and-investing-in-america-to-create-good-paying-jobs-and-reduce-costs
  2. Allison Good, Molly Christian, "IRA at 1: US heralds clean energy manufacturing 'renaissance'", S&P Global Commodity Insights, 7 August 2023, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/ira-at-1-us-heralds-clean-energy-manufacturing-renaissance-76610817
  3. Stephanie Tsao, "Issues in Focus: Inflation Reduction Act Cases in the Annual Energy Outlook 2023", Energy Information Agency, 16 March 2023, https://www.eia.gov/outlooks/aeo/IIF_IRA/
  4. Max Bearak, "Nations Aim to Zero Out Shipping Emissions by Midcentury," New York Times, 6 July 2023, https://www.nytimes.com/2023/07/06/climate/cargo-ship-emissions-agreement.html
  5. Anthony King, "Emissions-free sailing is full steam ahead for ocean-going shipping," European Commission, the EU Research & Innovation Magazine, 6 September 2022, https://ec.europa.eu/research-and-innovation/en/horizon-magazine/emissions-free-sailing-full-steam-ahead-ocean-going-shipping
  6. International Maritime Organisation, "IMO's work to cut GHG emissions from ships, International Maritime Organization. The Maritime Executive, "EU Parliament Finalises Emissions Trading Rules for Shipping," The Maritime Executive, 18 April 2023, https://www.imo.org/en/MediaCentre/HotTopics/Pages/Cutting-GHG-emissions.aspx. https://maritime-executive.com/article/eu-parliament-finalizes-emissions-trading-system-rules-for-shipping.
  7. Maersk Mc-Kinney Moller Centre for Zero Carbon Shipping, "The shipping industry's fuel choices on the path to net zero," Global Maritime Forum, April 2023, https://www.globalmaritimeforum.org/content/2023/04/the-shipping-industrys-fuel-choices-on-the-path-to-net-zero_final.pdf.
  8. Maersk Mc-Kinney Moller Centre for Zero Carbon Shipping, "The shipping industry's fuel choices on the path to net zero," Global Maritime Forum, April 2023, https://www.globalmaritimeforum.org/content/2023/04/the-shipping-industrys-fuel-choices-on-the-path-to-net-zero_final.pdf.
  9. "Renewable methanol," https://www.methanol.org/renewable/.
  10. Chris Chatterton, "Bunkering Italian Style, No Turning Back - Bunker Insurance Digitalisation LNG Focus," Methanol Institute, August/September 2022, https://www.methanol.org/wp-content/uploads/2023/05/Bunkerspot-No-turning-back.pdf
  11. "Methanol as a Marine Fuel," Methanex, https://www.methanex.com/sites/default/files/methanex_brochure_marinefuel_final2_032521.pdf.
  12. Sangbae Cha, "Navigating the future-fuel outlook for large merchant marine vessels," MAN Energy Solutions, 5 May 2023
  13. "What is US electricity generation by energy source?" US Energy Information Administration, https://www.eia.gov/tools/faqs/faq.php?id=427&t=3.
  14. "What is US electricity generation by energy source?" US Energy Information Administration, https://www.eia.gov/tools/faqs/faq.php?id=427&t=3.
  15. Importance of Methane," United States Environmental Protection Agency, 1 November 2023, https://www.epa.gov/gmi/importance-methane#:~:text=Methane%20is%20the%20second%20most,trapping%20heat%20in%20the%20atmosphere.
  16. "Importance of Methane," United States Environmental Protection Agency, 1 November 2023, https://www.epa.gov/gmi/importance-methane#:~:text=Methane%20is%20the%20second%20most,trapping%20heat%20in%20the%20atmosphere.
  17. "Accelerating the energy transition, Investor Presentation," Greenlane Renewables, October 2023, https://www.greenlanerenewables.com/about/industry-at-a-glance/.
  18. "Macquarie Capital launches renewable fuels platform Aerogy; completes financing of first US project," Macquarie Group, 18 January 2022,
  19. "Investing in renewable fuels to support the energy transition," Macquarie Group,
  20. "Commerce Celebrates First Anniversary of Inflation Reduction Act," U.S. Department of Commerce, 16 August 2023, https://www.commerce.gov/news/blog/tweets/commerce-celebrates-first-anniversary-inflation-reduction-act
  21. "FACT SHEET: One Year In, President Biden's Inflation Reduction Act is Driving Historic Climate Action and Investing in America to Create Good Paying Jobs and Reduce Costs," The White House, 16 August 2023, https://www.whitehouse.gov/briefing-room/statements-releases/2023/08/16/fact-sheet-one-year-in-president-bidens-inflation-reduction-act-is-driving-historic-climate-action-and-investing-in-america-to-create-good-paying-jobs-and-reduce-costs/